What are Classified Shares?
Classified shares are shares of a publicly-traded company that have different share classes, usually denoted by Class A shares and Class B shares. A detailed description of the different classes of common stock and their specific features, is set out in a company's bylaws and charter, but most often classified shares differ by the number of votes, or lack of votes, conferred by owning those shares. Classified shares may also differ by dividend rights. In mutual funds, classified fund shares will differ by fee structure.
Understanding Classified Shares
Classified shares are an example of a complex capital structure. Companies with complex capital structures may have a combination of several different varieties of common stock classes, with each share class carrying different voting rights and dividend rates.
Voting privileges are the main reason companies create different share classes, in addition to dividend rights and liquidation preference. Preferred stock usually does not come with voting rights, but guarantees a fixed dividend, while common stock carries the right to vote for the board of directors at the annual general meeting.
To provide a better defense against hostile takeovers, Class A shares, with higher votes per share, are often issued to insiders like the company's top management team and directors. While Class A shares typically offer shareholders more benefits, retail investors should not be concerned about the different classes of stock, if the company is well-managed.
- Classified shares are shares of a publicly-traded company that have different share classes, usually denoted by Class A shares and Class B shares.
- Most often classified shares differ by the number of votes, or lack of votes, conferred by owning those shares. Classified shares may also differ by dividend rights.
- In mutual funds, classified fund shares will differ by fee structure.
Preferred Class of Shares
Investors sometimes opt for an investment in preferred shares, which function as a cross between common stock and fixed income investments. Like common shares, preferred stock has no maturity date, represents ownership in the company and is carried as equity on the company's balance sheet. In comparison to a bond, preferred stock offers a fixed distribution rate, no voting rights and a par value.
Preferred shares also rank above common shares in a company's capital structure. Therefore, companies must pay dividends on preferred shares before they pay dividends for classes of common shares. In the event of liquidation or bankruptcy, preferred shareholders will also receive their payment before holders of common stock.
Mutual Fund Share Classes
Advisor-sold mutual funds can have different share classes with each class owning a unique sales charge and fee structure. Class A mutual fund shares charge a front-end load, have lower 12b-1 fees, and a below-average level of operating expenses. Class B mutual fund shares charge a back-end load and have higher 12b-1 fees and operating expenses. Class C mutual fund shares are considered level-load - there's no front-end load but a low back-end load applies, as do 12b-1 fees and relatively higher operating expenses.
The back-end load, known as a contingent deferred sales charge (CDSC) may be reduced or eliminated depending on how long shares have been held. Class B shares typically have a CDSC that disappears in as little as one year from the date of purchase. Class C shares often start with a higher CDSC that only fully goes away after a period of 5-10 years.
Real World Example of Classified Shares
The multi-class share structure at Google came about as a result of the company's restructuring into Alphabet Inc. in October 2015 (NASDAQ: GOOG). Founders Sergey Brin and Larry Page found themselves owning less than majority ownership of the company's stock, but wished to maintain control over major business decisions. The company created three share classes of the company's stock as a result. Class A shares are held by regular investors and carry one vote per share. Class B shares, held primarily by Brin and Page, have 10 votes per share. The Class C shares are typically held by employees and have no voting rights. The structure gives most voting control to the founders, although similar setups have proven unpopular with average shareholders in the past.